MERGERS AND ACQUISITION: The need for People Due Diligence

mergers and acquisitionFinancial due diligence alone isn’t enough. People due diligence is the make or break lever.

Almost all mergers fail to produce intended business results, experts say. Studies indicate that several companies fail to show positive results when it comes to mergers. Researchers estimate the range of failure to be 50–80%. After so many corporate marriages, the world having gone full circle, are now asking the one wise question “Why do mergers and acquisitions fail”? What does it take for a company to be successful, post merger?

Success or failure of mergers and acquisition certainly depends on executives having a realistic outlook. Some have been known to lose their sense of objectivity because they fell in love with the merger idea – wanting it to work no matter the cost. Most people who study M&A’s divide these transactions into four distinct phases: pre-deal (selecting the target); due diligence; integration planning; and implementation. From the time when the search for a bride starts, all through post – merger activities, executives need to remain objective, desiring the company’s greater good and not personal ego fanning. Secondly, do your key people buy-into the proposed merger/acquisition deal? . . . this is key, for leadership is a collective responsibility and more importantly, so as to buy the hearts and minds of your key people.

Much more strongly, many analysts have come to conclude that M & A’s fail due to poor attitude given to people and culture issues. It is common practice to conduct financial due diligence on a company preparing for a merger or acquisition. It is only regrettable that no proper people or culture inventory is taken. The traditional focus of M&A due diligence has been on “making the numbers work.” Typically, it is either an investment banker or corporate development officer who presents the acquisition opportunity to management. If doing the deal makes sense to management, the wheels are set in motion, a letter of intent is drafted, and the investigative process known as due diligence commences.

Financial, legal, regulatory, accounting and tax specialists are all assembled to value the target company, unearth liabilities, and confirm management’s assumptions. When everything in the examination checks out, the merger partners typically plunge forward — assuming that the strategic and people-related benefits of the merger will necessarily fall into line. However, the fact that most M&A transactions fail to achieve their strategic, operational, or financial objectives suggests that this assumption of presumed success is erroneous. Acquiring a company is really about acquiring people. 

As Nigerian banks are in a flurry of M & A activities it would be crucial that they take a look at these issues. In today’s knowledge-driven economy, models for financial due diligence are even changing. A study of financial analysts and portfolio managers reveals that, for the average analyst, 35% of his or her investment decision is determined by non–financial information. 21st century valuation models are now more robust; being made to include a number of intangible assets.

How then does the traditional due diligence process account for those items that never show up on a balance sheet or income statement. Items such as; brand value, management quality and credibility, quality of business processes, ability to attract and retain talented people, quality of corporate strategy, innovation etc. For due diligence to be thorough and for it to be the basis on which M & A decisions are to be taken, then it must include people and culture due diligence; IT & major business process due diligence and brand due diligence.

Let’s not forget the basics. What is the purpose of a merger or acquisition? Organizations merge so as to gain competitive advantage and value. They merge so as to achieve certain levels of synergies. Examples of such synergies are: growth in market share, leadership in industry consolidation, enhanced brand strength & reputation, reducing overhead/operating costs and compliance with government policy as in the case in the Nigerian banking sector. To be able to do this the financial health of both merging parties (acquire and acquiree) must be properly determined – this is what brought about the need for due diligence. It aims to objectively value the organizations assets and liabilities.

The financial and legal aspects of M&A planning are critically important to the success of any transaction. But this traditional “ledgers and liability” orientation toward due diligence highlights its principal shortcoming. A comprehensive valuation of an organization in today’s world would require us to take inventory of its people and culture. Compelling evidence now exists that firms with strong cultures achieve higher results because employees sustain focus both on what to do and how to do it. It has been found that most all–time–top–performing companies are clear in their culture and are passionate about it.

In General Electric leaders are held accountable for “making the numbers” and for “living the value”. One of the characteristics of ‘built to last’ organizations is their cult – like culture. It is said that IBM attained its greatest success, before Lou Gerstner, during the same era that it displayed its strongest cult – like culture. Interestingly after the company posted an $8 billion loss and Lou Gerstner was now brought in ’93 to turn things around, the toughest challenge he said he faced was that of changing culture. “Culture isn’t just one aspect of the game”, he writes. “It is the game”.

In conducting a people and culture due diligence some issues are critical. They range from conducting a top talent analysis – for executives and non-execs, people skill inventory, analysis of management credibility and depth, leadership assessments, employee attitude and performance history, quality of HR policies, internal structure, comparism of compensation and benefits systems, HR policies & procedures comparism – eg promotion policies, performance management system particularly for managers, culture assessment and definition, value of integration costs (salaries, allowances, and culture fusion).

There are some better-to–take–along benefits that make the need for conducting this kind of due diligence a need-to-do and not a-nice-to-do.

It leaves out most surprises. Being a more broad process it leaves less to the unknown. It aids us retain key talent. Retaining top talent is a major challenge for most businesses under any circumstances. Retaining key talent while coping with the organizational upheaval wrought by a merger or acquisition increases that challenge exponentially. Identifying the key human assets in a target company and quickly taking steps to keep them from walking out the door on announcement of the deal is a great result of this kind of assessment. An additional gain to people due diligence is that the actual value of the organization is known, the cost and length of integration is also clearer.

An acquisition or a merger initiates ‘turbulence’ of some sought and thus lets up some ‘dust’, conducting this kind of due diligence better prepares us to mitigate/contain fallouts of the M & A process.

References: Why Do So Many Mergers Fail” from Knowledge@Wharton , “Human Capital Due Diligence in the Merger Process” by Mark N. Clemente and David S. Greenspan; “The Correct Spelling of M&A Begins with HR” by Jeff Schmidt.